If We Must Have Subsidies....

If our political leaders insist on subsidies, then pause for a moment and consider how far just a few extra dollars can go in nudging Joe Six Pack (the "mainstream" consumer who's otherwise not even thinking about solar because he believes it's too expensive) to go solar.  Assume I can help Joe -- in my insolation zone (Gillis Springs, GA) install a 10KW system for net $18,200.  That would be $26,000 installed, but deduct 30% federal tax credit = $18,200.  Some would then say deduct another 35% Ga Tax Credit, which but in the past has been fleeting (capped at $5 million/year, big subsidy pigs can snatch it up), so for the moment we'll just stick with the federal credit, which Joe can spread over 5 years.

Joe now calculates 13,000/KWH a year yield on his system (mine's projected to make over 14,000/KWH a year but let's be conservative here).  He pays his utility (once one adds in all the fees and expected rate increases) $.12 cents/KWH and let's say his utility pays him $.07/KWH for excess energy that his new array will feed into the grid.  Thus, he saves $.12/KWH for every KWH his home consumes directly from his array during the day (and thus, that he doesn't draw from the grid) and he makes $.07/KWH for all power generated that his home does not consume but instead feeds into the grid.

Now watch this: "The typical home in Georgia consumes 1,000 kilowatt-hours (kWh) of electricity per month." 
Joe's array, meanwhile averages 1083/KWH a month production (13,000/12 = 1083).

Assuming his array supplies his home (during the day, of course, when the sun's shining) only 1/3 of the 12,000 KWH he consumes, hence, 4000KWH, Joe can be said to be paying himself $.12/KWH (what he's spared paying the power company) for that 4000KWH of power.

Without solar, his annual bill for 12,000 KWH (at $.12/KWH) is $1440
Using 4000KWH of his own power, he saves     $480 (4000 x $.12)
Sending 9000KWH back into the grid reaps him $630 (9000 x $.07)

So his "gain" is $480 (what he's saved) plus $630 in Net Energy Credit.  Total: $1110/year.  This is about where I am with my own 10KW system, as noted here.

Now suppose Joe puts $18,200 in a 16.25 year CD paying 6.1%.  His yield is $1110/year.   See where I'm going?  Joe invests $18,200 in a 10KW solar array and it "pays" him 6.1% a year simple interest, totaling $18,104 after 16.25 years.  Hence, his 10KW system pays for itself in 16.25 years. 

True, at the end of 16.25 years (if he invested $18,200 in a 16.25 year CD) he gets his $18,200 cash back from the CD, whereas he gets no cash back at the end of his 16.25 year solar array investment.  However, he does get an array guaranteed for 30, hence a 13.75 year remaining lifespan system which he can value at $15,262 (13.75 x $1110) plus (conservative estimate here) a $3000 increase in value to his home for having a Solar array on it.  Add more for putative increased electricity rate increases that his system spares him ($1000?).  Thus, he's not only gotten thousands more than his original cash back, but this tax free "CD" is also something he can work on, and tweak, to elicit even more "solar gold" out of it (we saw PCs improve productivity-wise over time, we will see PV's do so, too).

Meanwhile, Joe cannot get 6.25% on his money (at such a low risk) anywhere right now, right?

So now he starts thinking hmmm, maybe solar is something I can investigate.  And for Joe, it soon becomes all about payback cycle.  As in, how to shorten it, so he can pocket even more money.

So then he receives from his utility a pamphlet explaining that, for the first 50 customers (or whatever), and thanks to a voluntary Green Power Program, there will be an increase in his reverse-meter payment to $.14/KWH.  He then goes back to his spreadsheet:  He takes his 13,000/KWH per year and multiplies it by $.14, which may be low because he's going to consume some of his own power and, given expected price increases, he'll soon be paying the EMC at least $.14/KWH or more.

Now his net yield is $1740/year (9,000 x $.14 = $1260, then plug in the rest of the numbers above), thus shortening his payback cycle to just over 10.45 years.

And now he's making over 9.65% on his "Solar CD."  And at the end  of 10.45 years he's got a paid-for, 20-year solar power system sitting on his roof reaping nearly two decades of pure profit for him.

Ask Joe where he can get that on his money nowadays.

Even better, he has an incentive not to waste his solar power, and in fact to super-maintain and constantly tweak his system to reap more "meter gold."  This sort of incentive encourages conservation and careful spending (Joe's putting his money at risk, and working for just a sliver of public money, and can only reap it if he optimizes his feed into the grid).  Plus he and his kids and neighbors and kin all will be incentivized to experiment and tweak-optimize his system, just like a lot of folks hot-rod their cars and computers, to collect even more "meter gold" from it.

There's more.  Solar vendors can offer to increase the reverse-meter rate by a few more cents by offering rebates (buy a system from XYZ company and it will stream, say, $2000 into the utility's "Green Power Program" to pay Joe on top of the utility's reverse-meter rate).  This further shortens Joe's payback cycle and thus steps up his system-tweaking/conservation efforts (he also compares notes online and is constantly innovating for higher efficiency for more "meter gold"), not to mention his pleasure in bragging to his neighbors that he's got a 10KW system that will be paid off in less than 7 years (which, in turn, spurs more guys like him to buy more systems, and pretty soon there will be a "Solar Aisle" at Lowes and Home Depot).

There’s even more upside (note, by the way, that I’m not even mentioning environmental benefits, just focusing on individual wealth-building here): In my part of Georgia (Central Georgia), a lot of folks no longer trust the government (witness the record run-up in guns/ammo sales after Obama got elected) and gold/silver prices have skyrocketed.  Fear that cash savings may be turned into confetti by hyperinflation scares a good number into buying gold, silver -- items believed to not lose value precipitously.

But while gold bars can be hidden from confiscatory governments, they produce no wealth on their, own, and merely retain a market-fluctuatable value.  Solar panels are warranted for 30 years, and during that lifetime (a) can be sold/traded like gold bars; and (b) actually produce something -- electricity, thus money, thus wealth.  Plus people can add more “solar gold bars” as they prosper.  Part of that prosperity is self-escalating (more solar panels, more electricity, more money made, enabling even more panels, etc.). Too, there can now form a secondary market -- in solar panel trading (I can trade up to more efficient panels and resell my old ones ) -- bringing even more trade to our economy.

But of course, those panels lose their value if owners can’t plug them into the grid and reap their “meter gold” via Excess Energy Credits like my utility's currently paying me.  Hence, it’s of critical value, and that reverse-meter payment amount must be fairly decided.

Still more upside: The uncharted/unrecorded educational value of thousands of rooftop and back yard (or farm field) solar arrays.  Educational value?  Think about it.  Early computers (PCs) were tweaked, super-tweaked and constantly optimized by hundreds, then thousands, then tens of millions of “geeks” such that the $3000 system I bought in 1981 is now dwarfed in power/efficiency by the $300 system I can buy in 2011.  And in a relative blink of an eye hundreds of thousands of “apps” now exist for the Apple I-phone and Smartphones, including free voice-inputted language translation software so that when one travels to, say, Japan, their Smartphone will enable instant basic communication with a man on the street over there -- something right out of Star Trek.

Now think about Joe Six Pack’s meter reversing faster and faster and racking up more and more meter credits for him.  You know what will happen: Tens, hundreds, thousands and then millions of geekers and tweakers will do the same for home solar that they did for the home PC.  Why?  Because they are prospecting for “Solar Gold,” and they’ve got their rig that they can experiment with and put more money in their pocket, just as PC geeks eked more speed, storage capacity, processing power and productivity out their PC’s.

And how many high-tech, electrical and related careers will be launched by those motivated by The Solar Gold Rush of the 21st Century?  Ponder how many young boys and girls will be drawn into helping their parents super-tweak the family array, which helps the family prosper, and by definition compels those kids to learn useful technical knowledge and expand their intellectual and hands-on craftmanship skills accordingly. 

Finally, note the common thread running through the preceding paragraphs: It's all about the Solar Array’s payback cycle, which can be shortened on the front end (lower up-front costs, thanks to the Asians), and on the back end (step-up Joe's savings through increased reverse-meter rates), as well as mid-stream (somewhat perversely, the more the local utility raises its electricity rates over time, the more valuable Joe's system becomes, and the shorter its payback cycle).

Falling up-front prices and rising reverse-meter payments = shorter payback cycle.

By streaming subsidies to Joe through reverse-meter payments only, energy-efficiency and output optimization will be hyper-accelerated (millions of Joes tweaking their systems, and trading notes via internet-crowdsourcing in the process). And, unlike up-front (production-side) subsidies concentrated in the hands of a few, who can prodigiously waste them (examples: the Range Fuels Fiasco and this biomass subsidy debacle) here the subsidies would be sprinkled over mass numbers of folks who don't get them up front, but only if they efficiently produce and conservatively consume power -- from the sun -- thus the cleanest power on earth.

All of this exemplifies the sheer power of an extra $.07/KWH reverse-meter rate (which my local utility initially paid me, then raised to $.08/KWH).  And of add-on rates (such as via performance-oriented rebates from solar vendors who want to cite higher and higher solar yields in order to sell more panels).

It also underscores how fast all of this takes off as Solar PV prices tumble further, and reach $1 per installed watt (hence, a 10KW array will cost only $10,000, thus reducing the payback cycle to a 7-year car note).

Meanwhile, pause and appreciate the tremendous extra boost of $1000/year that additional $07/KWH (for a total of $.14/KWH) represents.  Joe sees free manna from heaven, literally (sunlight = $$$) and suddenly we have a (solar) gold rush, bringing prosperity to Central Georgia, especially there since rural counties have less zoning and private covenant barriers. 

Now suppose that extra $1000/year was capped at 8 years  -- the payback cycle noted above (hence, each "Joe" would be paid a maximum of $8,000).  Suppose further that the $8 billion Obama just signed away (any doubt that "loan guarantee" won't be irretrievably consumed?) for Georgia's latest nuclear power plant went into the proposed "Million Suns" reverse-meter rate program that I'm conjuring up here.

The result?  One million Georgians could be paid $8000 for one million 10KW systems.  One million times 13,000 KWH/year = 13 GW of power.  And one million Georgians would own the equipment, not one company.  That power generation would be dispersed, not terror-targetable concentrated in one place.  And the sheer wealth would be spread directly to one million taxpayers, then multiplied via their collateral purchases (installer labor, mounting system hardware, etc.), rather than funneled into the pocket of a $2 billion profit, monopoly-driven Big Power company that then peels off some of that to fund $3.47-billion/year lobbyists to push for anti-competitive legislation -- and, because it is a monopoly, has no incentive to constantly tweak and optimize efficiency (easier to just pass costs on to rate/taxpayers).

Now it's true, solar represents variable, not base-load power, and I know that saying a "storage system" or smart-grid based, blended energy system will come soon is more hope than reality (hence, we will need brown power for a while yet, pick your poison wisely here). But is that any different than building a nuclear power plant on the sheer hope that its 250,000 year waste-storage problem will "someday" be solved?  Or that we should keep building coal plants on the hope that "clean coal" technology will "someday" arrive (and this of course ignores the earth-disturbing and transportation costs that precede just being able to burn the coal at a coal-power plant in the first place, plus the transmission-lost cost of central-sourced power)?  And there is some indication that Solar PV can be a better overall deal than the expense of stand-by brown (coal) power plants for peak load -- see this fellow's comments on that score, and this working paper.

I have called upon my utility to help me on this, and I offered devote my efforts -- through a non-profit organization along these lines -- to make 10KW systems available to its customers for the up-front price of $26,000 installed, and help taxpayers reap their federal tax credit.  I have asked it to just stop and think of the sheer economic multiplier effect alone, then add to that the fact that Solar PV injects into our economy net new wealth, not "government-printed" wealth.

Again, while I'm against forced subsidies, check out the powerful effect of less than 3 cents added to each person's power bill (it would fund an $.11/KWH additional reverse-meter payment for up to 5 MW of power-generation).  While recent history shows that direct subsidies to clean energy manufacturers is counter-productive, they would at least have a better chance of producing net economic good with "back-end," performance-based incentives (reverse-meter payments) to end-users.

Why?  Because those payments only flow to the end user who puts his own money and efforts at risk first, and only rewards him if he produces, at the back-end of his solar project, net-excess energy (hence, the built-in conservation element).  In contrast, direct subsidies (federal grants and guaranteed loans that will never be repaid), attract carpetbaggers who scarf up the free money then leave town (
Evergreen solar, which sucked $43 million out of "Taxachussetts" then fell to penny stock status and sold out to the Chinese; Solyndra; and Range Fuels in GA). 

Direct, up-front subsidies also create market bubbles.  As this column explains about the bubble in the solar PV market: “Worldwide supplies of solar panels vastly outpace demand. Through 2013, the subsidized solar industry will produce an average rate of 26 percent more product than it can sell.”
  And in Germany, “the country's lavish subsidies have blocked innovation and delayed the advent of cost-competitive solar power worldwide."  This predictable result escapes this well-meaning greenie, who laments a utility's announced decrease of up-front subsidies in light of natural price-declines for solar power. With performance-based reverse-meter payments, "Joe" has every incentive to get his array up as cost-efficiently as possible, optimize its yield, super-maintain/tweak it, and conserve the energy that it produces -- because he wants to watch his "meter gold" flow into his pocket.  High German FIT  (Feed-In-Tariff) payments, as claimed mostly in the comments here, are reported to work a positive effect on individual Solar PV ownership (yeah, I'd like to see some serious independent studies on that).

All truly free-markets respect that core pleasure/pain human dynamic.  When governments enable corporate types to gamble OPM (Other People's Money) rather than their own, overproduction and other inefficiency risks are too easily socialized.  A truly free market rewards only the most efficient.  But efficiency must be fairly defined -- brown power is not "more efficient" and thus "better" than green power merely because its market price per KWH is lower, unless that lower price is unsubsidized and accounts for the pollution-price we must all pay.  Conversely, if Joe produces a KWH while consuming no water and generating no pollution, those environmental-savings factors ought to figure into his price. Meanwhile, Texas -- the biggest brown-power state of them all -- is showing us how green and brown sourced electricity can be harmoniously blended, though I concede that even there its green (wind) power is being federally subsidized. 

At bottom, this is a complex area, and I remain against subsidies because they prop up products no one wants, waste tax dollars, and produce only destructive bubbles.  More on that here and here.  But one simple upside is that "Joe," with the coming price-collapse of solar panels in 2012 (due to, ironically, over-subsidization on a global scale), will ultimately reap
grid parity solar array pricing (hence, he'll be able to produce his own power at the same or less cost than brown power).  He then will be able to invest in his own home's 100%-sufficiency (if not excess) power system and thus use less pollution-causing (brown) power.  I can't see anyone arguing with that.  And the least Georgia's utilities can do is not stand in his way with subsidy-deflated, reverse-meter credit pricing, nuisance fees and anti-competitive legal/operational barriers.

Another political choice to be made here: Exempting Solar improvements from property taxes.  Check out this solar farm that failed to account for the increased property tax hangover that can follow a large-scale solar installation.  Subsidies, as this 2007 paper shows, is a very complex subject and subsidies are tangled up in every power industry sector -- the antithesis of the free market's Invisible Hand that Adam Smith envisioned.

A lot has been written about Feed-In-Tariffs (FITs) in Germany and other European countries.  Here's a good book on the subject.  Here's America's first foray in that area.

Note this "Sunshot Initiative" attempt to blend an X-Prize into the mix to bring installed Solar PV prices down to $2/watt.  That might be a useful way to go.